Another 1% slashed from interest rates

The Bank of England slashed interest rates by another 1 per cent today as policymakers stepped up their battle to stave off a deep recession.

The dramatic percentage point cut takes the cost of borrowing from 3 per cent to 2 per cent - a rate not seen since 1951 and equal to the all-time record low in the UK.

It follows last month's shock 1.5 per cent cut - the biggest for more than 27 years - and comes amid mounting concern that the UK is facing a deep and prolonged recession.

Britain's biggest mortgage lender Halifax confirmed it would pass on the cut to its 600,000 borrowers with base rate tracker deals.

But it is unlikely that all borrowers with standard variable rate mortgages will see the full benefit, despite increasing pressure from the Government.

The Bank said in a statement accompanying its decision that "there remained a substantial risk of undershooting the 2 per cent Consumer Prices Index inflation target".

It added: "In the United Kingdom, business surveys have weakened further and suggest that the downturn has gathered pace.

"Consumer spending and business investment have stalled, while residential investment has continued to fall."

Homeowners with a typical £150,000 mortgage will see their monthly repayments reduced by £85 if lenders pass on the cut in full.

Those with a £250,000 home loan would be £142 a month better off.

The cut, the sixth since last December, was welcomed by a retail sector reeling from the collapse of Woolworths and MFI into administration.

Stephen Robertson, director general of the British Retail Consortium, said: "This is exactly the type of decisive action we need during these uncertain times."

But he called for further cuts to get cash-strapped consumers spending again.

"The Bank's job is not done. It must continue to cut rates in the New Year to get the economy heading in the right direction again," he said.

The Bank's Monetary Policy Committee (MPC) has now cut rates three times in a row and its 1.5% reduction last month took experts by surprise.

However, minutes of November's rates meeting showed that the committee even considered slashing rates by 2 per cent, while a recent easing in sky-high inflation has given it greater room to ease monetary policy.

Inflation is now dropping at its fastest rate for 16 years, falling from 5.2 per cent to 4.5 per cent in October.

The MPC decided to hold off from a bigger cut last month ahead of the Chancellor's Pre-Budget Report.

But the 2.5 per cent cut in VAT and other measures outlined by Alistair Darling are feared not to be enough to encourage consumers to boost the flagging economy.

House price figures today showed values falling faster last month, down a further 2.6 per cent in the biggest monthly drop since September 1992.

Survey data yesterday from the beleaguered services industry showed activity shrank at its fastest pace for 12 years in November, with similar recent dire news from the manufacturing and construction industries.

But Bank Governor Mervyn King told MPs last week the lending drought now posed the single biggest risk to the UK's economy.

He also said the MPC may have to consider cutting rates "more than we would otherwise have done" as lenders failed to pass on base rate cuts in full.

Following last month's 1.5 per cent reduction, 87 out of 95 lenders with a standard variable rate passed on some of the cut to their customers, although 57 did not reduce their SVR by the full amount, with some cutting it by only 0.25 per cent.

A similar pattern is expected to emerge this time.

And at the same time, up to 1.2 million homeowners with tracker mortgages, which should automatically move up and down in line with the base rate, are unlikely to benefit from the full cut due to the terms of their deal.

Today's move from Halifax to pass on the cut comes in spite of an option in its tracker deals not to pass on all or any reduction once the base rate fell below 3 per cent.

It follows speculation that City watchdog the Financial Services Authority could force the group to pass on the cut as borrowers had not been made aware of the clause when they took out their mortgage.

Bailed out banks HBOS, Lloyds TSB and Royal Bank of Scotland have also pledged to pass on cuts to businesses after coming under pressure from the Government.